Did our industry foster the “protection gap”?
Over the years the insurance and financial advice sector has often lamented the “protection gap”; that is the gap between what the insurance market thinks people should be insured for in the event of death or disability and what they are insured for.
Are we, and by we, I mean employers and employee benefit consultants, partly to blame for an increase in this gap?
Research by the Money Advice Service showed that over half of working age couples don’t have life insurance and equally the Centre for Economic and Social Inclusion, commissioned by the ABI, found that more than 60% of working families would see their income fall by more than a third if the main earner had to stop working due to ill health.
Employers trying to fill the gap
Many employers have put in place compensation and benefits packages to help employees close that gap. The extension of life and income protection to new employees continues at pace, with over 11.5m working age adults now insured through a group scheme in the UK.
If you or an employee has been lucky enough to have saddled yourselves with an eye wateringly large mortgage of late, then you will invariably have been asked whether, in the event of your death or disability, you have provisions available to enable continued payment.
Many employees are provided with such cover by their employers, however substantial numbers are not (the lack of portability of group risk between employers is another story!).
How did this come about? And have we as an industry of reward and employee benefit professionals and consultants been firm enough in efforts to mitigate it? In particular have changes to the pension landscape had a knock on effect of widening this protection gap?
Learning from mistakes
I like the mantra that you learn far more from mistakes than you do from success. Out of the many mistakes that changes to benefits legislation over the previous decades brought, it’s possible that one in particular has contributed more than most; the closure of final salary, defined benefit (DB) pension schemes.
This has been much commented on, and with justification. Thousands of DB schemes have closed to new joiners over the last few decades. These schemes provided “gold plated” pensions which are the envy of the younger worker.
However many of them provided much more than simply a pension; death in service lump sum payments were a mainstay, with death in service pensions payable to dependents a widely available feature. Many trustees also had the discretion to grant Ill Health Early Retirement (IHER) pensions to members who were unable to work due to disability through ill health or accident.
The impact of DB closures
The closure of these DB pension schemes has in many cases resulted in a corresponding loss of access to not just a gold plated pension, but also these protections that came alongside it.
Considerate and foresighted employers often made provision to protect against this, resulting in replacement group life insurance for death in service and group income protection for IHER, for many employees. Deficit repayments aside, the long term savings available from moving out of a DB environment makes affording life and income protection insurance for employees comparatively cheap.
Group life in particular has been a keen beneficiary of this, but take up of income protection by employers has been comparatively light, despite that loss of IHER.
Income protection is amongst the most tax efficient benefits that can be provided to employees and like group life it is not a benefit in kind and the premiums can also normally be offset against profits for tax purposes.
However, do enough employers with DB scheme closure plans realise what is being lost in IHER and how effective a replacement income protection can be?
The benefit of income protection
We have recently worked with a large employer who acknowledged that this gap was detrimental to their employees and decided, many years after closing their DB arrangements, that providing income protection to their thousands of staff was the correct benefit to add to their reward mix.
The payment of well over £2m in annual premiums made such a difference to employees in actual value that it was a worthwhile spend.
This was a two year project in the making. For those employers with difficult DB funding decisions to make, we believe that firm challenge should be made by employers and their consultants, on what should take its place. Not just as a form of deferred remuneration and savings vehicle, another pension, but also the associated protections that were provided.
With thousands of DB schemes still accruing benefits, this is a hot agenda item for HR and finance alike. I personally hope that HR reward and benefits professionals widen the scope of conversation beyond pensions to consider the wider protection gap and how they can play a part in closing it.
Tristram Hawthorn is principal at JLT Employee Benefits.
This article was provided by JLT Employee Benefits.
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